Review: The Stochastic Approach and Systems of Index Numbers

El-Hoseeny Abd El-bar Rady, Aly Ibrahim Mohamed, Ahmed Amin El-sheikh, Hanan Mohamed Mostafa Mohamed

The main objective of the paper is to review a number of widely used multilateral index numbers for international comparisons of purchasing power parities (PPPs) and real incomes that can be derived using the stochastic approach. The paper discuss that price index numbers from commonly used methods like the Iklé, the Rao-weighted, and an additive multilateral system are all estimators of the parameters of the country–product–dummy (CPD) model. The paper also presents the method of moments (MOM) as an approach to estimate PPPs under the stochastic approach and shows how the Geary–Khamis system of multilateral index numbers is a method of moments estimator of the parameters of the CPD model.